Investors in a 721 exchange typically exit by holding operating partnership units long term, converting those units into REIT shares, or converting into cash if the agreement allows. The tradeoff is that liquidity is usually limited at first, and converting units generally triggers a taxable event, so exit planning matters as much as entry planning.
A 721 exchange lets you contribute property to a REIT operating partnership in exchange for OP units. Those units are not publicly traded, so they are not immediately liquid the way common stock is.
For most investors, the practical exit path looks like this:
• Hold the OP units and continue receiving distributions
• Convert OP units into REIT shares when permitted
• Sell the REIT shares after conversion
• In some structures, redeem for cash if the agreement allows
This is why a 721 exchange is often described as offering more liquidity than direct property ownership, but not immediate liquidity.
The main reason investors cannot exit right away is the lock-up period. Many UPREIT agreements restrict conversion of OP units for a year or longer. In some cases, the REIT may want to hold the contributed property for a period while it is integrated into operations.
That means a 721 exchange can improve future liquidity without solving a short-term cash need. If you may need capital soon after the transaction, the structure may feel less flexible than expected.
The most common way to exit is to convert OP units into REIT shares and then sell those shares over time. This can be simpler than selling a whole property, and it may let you liquidate gradually instead of all at once.
Still, investors should remember two important points:
• Converting OP units generally triggers recognition of deferred gain
• Once converted, value is tied to the market performance of the REIT shares
So while the exit may be operationally easier, it can come with tax consequences and market risk.
Because the tax bill usually arrives when units are converted or redeemed, many investors focus on timing rather than speed.
Common approaches include:
• Long-term hold: Keep OP units, defer taxes further, and continue receiving distributions.
• Staggered conversion: Convert units in stages over multiple years rather than all at once.
• Lower-income year conversion: Coordinate conversion timing with your broader tax picture.
• Estate planning hold: Some investors hold units until death so heirs may receive a step-up in basis, subject to current law and individual circumstances.
A 721 exchange is generally a one-time deferral strategy, not an endlessly repeatable one like a series of 1031 exchanges. Eventually, many investors will face a taxable event if they want liquidity.
Before using a 721 exchange as a liquidity strategy, consider:
• Your likely cash needs during the lock-up period
• Whether the REIT agreement permits share conversion, cash redemption, or both
• How much market volatility you are willing to accept after conversion
• Whether you are comfortable giving up direct property control
• How the eventual tax hit fits into your long-term plan
For many property owners, the real benefit is not instant access to cash. It is the ability to move from concentrated property ownership into a more passive structure with a clearer eventual path to liquidity.
Usually not. Most 721 exchange structures include a lock-up or lockout period that limits when you can convert OP units into REIT shares or cash. Even after that period ends, your exit rights depend on the partnership agreement, so investors should review those terms carefully before committing.
In many cases, yes. The original property contribution can defer capital gains taxes, but converting OP units into REIT shares or cash generally triggers a taxable event. The exact impact depends on your basis, holding period, and overall tax situation, so tax guidance is important before acting.
It can be, but only over time. Directly owned real estate may take months to market and sell, while OP units may eventually be converted into shares that can be sold more easily. However, OP units are not publicly traded, and lock-up periods can delay that liquidity.